SHA-256 is hash for local passwords. This hash is visible in both the XML config file (.cfg) and ASCII (.xsf). All existing users (created with older software) are still recognized and their MD5 hashes can be verified.
However, if a new user is created or a password is changed, it will use the SHA-256 hash. After a downgrade, older software will not be able to validate users with the SHA-256 hash. Upgrading will not automatically change the hash for existing users.